Part A

–

Research Question:

Asset Revaluation

and Earnings Management

(40% of assignment)

 

AASB 116 requires

each class (a category of non

-

current assets having a similar nature or

function)

of property, plant and equipment to be measured at either cost or revaluation

model (fair value)

.

Under the revaluation model, e

quipment whose fair value can be

measured rel

iably shall be carried at a revalued amount, being its fair value at the date of

the revaluation less any subsequent accumulated depreciation and subsequent

accumulated impairment losses. Revaluations shall be made with sufficient regularity to

ensure tha

t the carrying amount does not differ materially from that which would be

determined using fair value at the end of the reporting period.

Entities may switch from fair

value to cost for justifiable reasons and provided adequate disclosures are made (AASB

1

16)

.

 

Using no more than 2,000 words

(including

introduction and

conclusion

, but excluding

references)

, you are required to write an essay to answer the following questions. Support

your answer by citing creditable references such as newspapers and articles from

practitioner (professional) journals and scholarly journal articles.

 

Questions:

 

i.

What are th

e pros and cons of choosing fair value method? Provide at least

three

for

each

pros and cons

and explain in detail.

(

S

uggested

no. of

words:

6

00

-

800

)

 

ii.

Name two

types of companies

that

are more likely to choos

e to revalue non

-

current

assets.

Why?

Provide examples.

(

S

u

ggested

no. of

words:

3

00

-

4

00)

 

iii.

Discuss

any managerial discretions

available to the firms

when revaluing/devaluing

non

-

current assets?

(

S

uggested

no. of

words: 300

-

400

)

 

iv.

What are the economic consequences of asset revaluations? (S

uggested words:

300

-

400

)

 

Part B

–

Group Accounting

–

Consolidation

(100 Marks in total, 60% of assignment)

 

On 1 July 201

1

,

East

Limited purchased 70% of

West

Limited’s shares for $600,000 cash. On that day, the equity

of

West

Ltd was:

Share capital

$520,000

Retained

earnings

220,000

$740,000

At the time of acquisition,

West

Ltd recorded all its assets at their fair values except for an item of plant and some

land.

East

Ltd considered that an item of plant shown in the accounts of

West

Ltd was less

than the fair value.

The fair value should be 84,000 not 60,000 as shown in

West

Ltd's accounts. The plant was assessed to have

a remaining useful life of 6 years and was to be depreciated on a straight

-

line basis. The land was recorded in

the accounts o

f

West

Ltd of $50,000 and

East

Ltd considered its fair value to be $60,000. On 25 May 2016, the

land was sold to an unrelated party of

East

Ltd and

West

Ltd. On 30 June 2016, the financial statements of

East

Ltd and

West

Ltd are as follows:

Statements of Financial Position of

East

Ltd and

West

Ltd as at 30 June 2016

 

East

Ltd

West

Ltd

Assets

Cash

435,700

451,460

Accounts Receivable

216,000

95,800

Less:

Allowance for doubtful accounts

(19,500)

196,500

(8,590)

87,210

Dividend Receivable

67,500

0

Inventory

279,000

51,210

Total Current Assets

978,700

589,880

Non

-

current assets

Deferred Tax assets

72,000

37,000

Investment in

West

Ltd

600,000

0

Land

235,000

160,000

Property, Plant and Equipment (PPE)

1,600,000

1,200,000

Less: Accumulated depreciation of PPE

(400,000)

1,200,000

(450,000)

750,000

Total non

-

current assets

2,107,000

947,000

Total Assets

3,085,700

1,536,880

Liabilities and Equity

Current Liabilities

Accounts Payable

48,600

42,580

Dividend Payable

150,000

100,000

Income tax payable

378,000

73,000

Other payable

10,900

13,500

Total current liabilities

587,500

229,080

Non

-

Current Liabilities

Bank Loan

250,000

0

Total Liabilities

837,500

229,080

Shareholders’ Equity

Share capital

1,080,000

585,000

Retained earnings

945,000

692,000

Revaluation Reserve

223,200

30,800

Total shareholders’ equity

2,248,200

1,370,800

Total Equity and Liabilities

3,085,700

1,536,880

Statements of Comprehensive Income of East Ltd and

West Ltd for the year ended 30 June 2016

 

East Ltd

West Ltd

Sales revenue

$4,410,600

$2,769,930

Cost of goods sold

(1,708,600)

-

1,659,400

Gross profit

2,702,000

1,110,530

Other income (expense)

-

245,650

22,500

Operating income

2,456,350

1,133,030

Expenses

(1,757,640)

(860,200)

Net profit before tax

698,710

272,830

Income tax expenses

(209,613)

(81,849)

Net profit after tax (NPAT)

$489,097

$190,981

Retained earnings at 1 July 2015

605,903

601,019

Dividend declared and approved, but

not yet paid

(150,000)

(100,000)

Retained earnings at 30 June 2016

$945,000

$692,000

 

The following information is available at 30 June 201

6

:

 

•

During the financial year ending 30 June 201

6

,

West

Ltd sold inventory to

East

Ltd for $250,000. The

inventory cost

West

Ltd $200,000 to produce. 60% of this inventory was sold to other entities outside the

group at the end of the financial year. Both

East

Ltd and

West

Ltd use the

perpetual inventory system.

•

During the financial ye

ar ending 30 June 2015,

West

Ltd had sold inventory to

East

Ltd at a price of

$140,000. The cost of the inventory was $60,000. For the financial year ended 30 June 201

5

, only 25%

of this inventory had been sold by

East

Ltd to its customers. During the fina

ncial year ending 30 June

2016, a further 70% of the opening balance of this inventory was sold by

East

Ltd to its customers.

•

West

Ltd sold an item of plant to

East

Ltd for $160,000 on 1 July 2014. The original cost of this plant was

$200,000 and the carr

ying amount was $140,000 as at 1 July 2014.

East

Ltd estimated this item of plant

had a remaining useful life of four years with no residual value.

•

East

Ltd sold an item of equipment to

West

Ltd for $35,000 on 31 January 2016. The carrying amount

recorded

in

East

Ltd’s account was $40,000 as at 31 January 2016. The equipment has an estimated

remaining useful life of five years with no residual value.

•

The recoverable amount of goodwill as at 30 June 2016 was determined to be $75,000. As at 30 June

2015, go

odwill has been impaired for $10,000. Prior to 30 June 2015, no impairment loss was recorded

because the carrying amount of goodwill was lower than its recoverable amount.

•

Dividend was declared and approved by

West

Ltd on 1 June 2016. No other dividend had

been paid by

West

Ltd during the financial year.

•

Income tax rate is 30%

 

Required:

1.

Prepare acquisition analysis on 1 July 201

1

, and journal entrie

s to record the acquisition of 7

0

% interest

in West

Ltd

in

East

Ltd’s records

. (10 marks)

 

2.

Prepare the consolidated adjustments for

East

Ltd and its controlled entity on 30 June 201

6

, and offset

deferred tax liabilities

as at 30 June 201

6

(if any) with deferred tax assets arose from the consolidation

adjustments. (4

5

marks)

 

3.

Calculate non

-

contr

olling interest (NCI) in the profit for the f

inancial year ended 30 June 201

6

, the

opening ret

ained earnings as at 1 July 201

5

, and the reserves and share capital as at 30 June 201

6

.

Prepare the consolidated entries for NCI for the financial year ended 30

June 201

6

. (

15

marks)

 

4.

Using the format of the template provided, complete a consolidation worksheet and post all consolidation

journal entries into the worksheet. (

3

0

marks)

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